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CHAPTER 15

EXEMPT CORPORATIONS

Section 11 of the 1916 Law expressly exempts fourteen classes of corporations from the tax. The first eight of these classes were exempt under the 1913 Law, the last six classes were added by the 1916 Law. Exempt corporations under the 1913 Law were exempt from all provisions of the law, and it was held that this included exemption from the duty of acting as withholding agent. The exemption of the 1916 Law is limited to the tax and to the making of the return of annual net income.1 Exempt corporations are now required to withhold the tax at the source and to report payments of income to others, in the same manner as is required of taxable corporations.2 Corporations exempt under the 1916 Law are also exempt to the same extent under the 1917 Law.

Foreign Corporations. The provisions of Section 11 of the 1916 Law are held to apply to foreign corporations as well as to domestic corporations, except as to building and loan associations and co-operative banks. In case a foreign organization desires to be held exempt from the law, and a doubt exists as to whether or not it comes within the class of organizations enumerated in Section 11, it will be required to file a copy of its

1 Act of September 8, 1916, § 13.

2 T. D. 2407.

F. I. Tax.-13

Charter and By-laws and an affidavit executed by its principal officer showing the disposition made of such income as it receives and stating specifically whether or not any of the income so received inures to the benefit of any individual stockholder. The question of whether or not the organization will be held to be exempt is determined by the Treasury Department upon the facts so shown.3

Exemption Limited to Classes Specifically Enumerated. Any corporation, no matter how created or organized, or what the purposes of its organization may be, is taxable unless it comes within the classes of organizations specifically enumerated as exempt. A corporation is not exempt simply and only because it is primarily not organized and operated for profit. If income within the meaning of the law arises and accrues to a corporation, such income will be subject to the tax unless it is one of the exempt organizations expressly enumerated in Section 11. Thus, commercial men's associations, and like organizations are not exempt, as they are not expressly enumerated, although they may be corporations not organized for profit.

Where Question as to Right of Exemption Exists. Where there is any doubt as to the status of a corporation under the provisions of the law, and its exempt status has not been established by the Treasury Department, the annual return should be filed (in blank if

3 Letter from Treasury Department dated December 6, 1916; I. T. S. 1917, ¶ 1134.

4 Reg. 33, Art. 80; T. D. 2152. This Treasury decision also held farmers' mutual fire insurance companies to be taxable, but the 1916 Law subsequently expressly exempted such organizations

desired) and an affidavit attached thereto setting out fully the nature and purpose of the organization, the source of its income and what disposition is made of it and particularly of any surplus.5

Right of Exemption Must Be Proved on Request. Corporations enumerated as exempt may at the request of the Collector or Commissioner of Internal Revenue, be required to establish their right by showing the character and purpose of the organization, the manner of distributing the net income, if any, or that none of the net income inures to the benefit of any private stockholder or individual. In the absence of such a showing such organizations may at any time be required to make returns of annual net income or disclose their books of account to a revenue officer for examination in order that the status of the company may be determined." Having once satisfied the collector as to its right to exemption a corporation is not required to make any further showing in subsequent years unless the collector has reason to believe that the status of the organization has changed, or that its net income is inuring to the benefit of the stockholders or members."

Labor, Agricultural and Horticultural Organizations (first class). Although the law exempts these organizations without any qualification, the exemption is undoubtedly intended to apply only to such organizations as are not organized for profit but are organized for the mutual welfare of their members. Thus agricultural

5 Reg. 33, Art. 91; Letter from Treasury Department dated November 1, 1916; I. T. S. 1917, ¶ 1133.

6 Reg. 33, Art. 88.

7 Mimeograph letter to Collectors No. 1148.

corporations owing sugar plantations and disposing of the product thereof have been held by the Treasury Department to be organized for profit and not entitled to exemption as agricultural organizations under this provision.8 County fairs or like organizations not themselves engaged in agricultural or horticultural pursuits, but which, by means of awards, premiums, etc., are intended to encourage better production, and no part of whose income inures to the benefit of any private stockholder or individual, are held to be exempt.9

Mutual Savings Banks (second class). The mutual savings banks which are exempt are those not having a capital stock represented by shares. As to what constitutes a mutual purpose see the discussion in the paragraph on building and loan associations below.

Fraternal Beneficiary Societies (third class). Fraternal beneficiary societies, orders or associations are exempt if they operate under the lodge system or if they are for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and if they provide for the payment of life, sick, accident, or other benefits to the members of such society, order or association or their dependents. One important characteristic of this class of exempt corporations is that they must operate under the lodge system or be for the exclusive benefit of a society operating under such system. Such a society or organization is considered to be one organized under a charter, with properly appointed or elected officers, with an adopted ritual or ceremonial, holding meetings at stated intervals, and supported by

8 T. D. 2090.

9 T. D. 1737.

fees, dues or assessments.10 Mutual protective associations, not operating under a lodge system are not exempt under this provision since they lack one of the characteristics of this class.1 11

Domestic Building and Loan Associations and Cooperative Banks 12 (fourth class). A domestic building and loan association is held to be one organized under the laws of the United States or of a state or territory or under the laws applicable to Alaska or the District of Columbia. Mutuality in operation and in the distribution of profits and benefits is essential to exemption In order to come within the exempted class such associations must not only be domestic but they must be without capital stock and be organized and operated exclusively for mutual purposes and without profit; that is, all the profits and benefits provided for in the articles of association and by-laws must be ratably distributed among all the members, regardless of the kind of stock held, according to the amount of money they have on deposit. An association issuing different classes of stock upon. which different rates of interest or dividends are guaranteed or paid is not in the exempt class.13 Under the 1909 Law it was decided that a building and l^an association was exempt although it issued both prepaid and instalment stock. but that one issuing preferred stock was not exempt.14 Mutual benefit does not necessarily

10 Reg. 33, Art. 89.

11 Commercial Travelers Life and Accident Association v. Rodway, 235 Fed. 370. This case contains an extended discussion on the distinction between a mutual association and a fraternal association.

12 Co-operative banks were included by the 1916 Law.

13 Reg. 33, Art. 87.

14 Pacific Bldg. & Loan Ass'n v. Hartson, 201 Fed. 1011.

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